Our Investors’ Council, held annually in Versailles’ storied Trianon Palace, holds a special place in Infrastructure Investor’s portfolio of events. If Berlin, with its 800-plus delegates, is our most inclusive event, then Versailles, at an average of 50 attendees, is its intentionally smaller, more exclusive, discussion-minded cousin.
The key word here is discussion. Put simply, Versailles is the place where an elite group of infrastructure investors gets together every year to discuss in detail some of the most pressing issues affecting the asset class.
Last year, then senior editor Andy Thomson raised four such crucial topics in his opening discussion. With this year’s edition happening on Friday 3 June, we take a look at how some of those questions have shaped up over the last year.
How low is too low for core investment – and when do the returns no longer compensate sufficiently for the risk?
Short answer: we are still finding that out, as acquisition multiples balloon and returns continue to compress.
But important questions are being raised. As Whitehelm Capital’s Graham Matthews eloquently put it in our June issue, combining a 25x EBITDA multiple with a 6 percent to 7 percent return demands strong cumulative growth in the profit of the acquired asset. The problem is, the low growth and low interest rate environment that makes investors accept those diminished returns is not really conducive to that kind of strong growth.
Expect this to continue to be a key talking point at this year’s event.
What is the future for direct investments? Is it a redundant model suitable only for large, experienced practitioners?
Whether direct investments are a redundant model suitable only for large investors doesn’t change the overwhelming investor desire for a more tailored approach as an alternative to blind pool fund investing. Hence the steady rise in demand for structures like separate accounts and co-investment programmes.
CalPERS last year famously chose the former as its preferred way of increasing its infrastructure exposure. In May’s keynote interview, Wendy Norris explained the latter gave Future Fund all the control it needed. Others, like Anbaric’s Ed Krapels, believe platform companies are the way to go.
Blind pool funds are in rude health – but LP demand for greater control, direct or more intermediated, is not going anywhere anytime soon.
With governments reluctant to dispose of assets, is there a lack of dealflow and assets coming to market?
One year later, the answer is still a resounding yes. As John Armitt summarised it at this year’s Berlin Summit: “There is no shortage of funds, but there is a shortage of good solid projects [with] revenue streams protected from government interference.”
The problem is twofold: not only are governments still reluctant to dispose of assets (with the exception of Australia, you’ll be hard-pressed to find a government offering a consistent privatisation programme) but they are increasingly interfering with the existing pipeline of available assets. For a case in point, look no further than the UK government’s recent curtailment of its renewables industry.
The flipside to that is that corporate disposals and private-to-private deals continue to be in good health, especially in the mid-market.
Is there a lack of infrastructure managers – and skills – in the mid-market?
On the face of it, the answer would have to be a clear ‘no’. If anything, 2015 was the year of the mid-market, with strategies like I Squared Capital raising considerable sums ($3 billion) for new vehicles focused on it and many veteran houses declaring the mid-market as the place to be in, especially in Europe, where the larger end of the market looks increasingly saturated.
Of course, with all this attention, one has to wonder how long it will take for the mid-market to become equally saturated. The answer? Maybe not that long. As InfraVia’s Bruno Candes told us in December, some managers are already underwriting €100 million investments at 8 percent. Sounds like large-cap to us.
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